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The 30-year bull market in U.S. Bonds has reduced yields to paltry levels. The 10-year Treasury yield spent much of the past week below 1.6%. Its half-century average is over 6%.

Because bond prices move in the opposite direction as yields, investors who buy longer maturities to pick up extra yield can suffer losses if interest rates jump. Those who stick with short maturities may have it even worse. Yields there are so low that a million dollars placed in six-month Treasuries generates annualized income of barely $1,000. Inflation, meanwhile, reduced the buying power of that $1 million by $22,000 over the past year.

Riskier bonds pay more than safe ones, so yields on "junk"corporate bonds are attractive relative to Treasuries. But that's like saying a kick in the backside is better than an eye poke. Neither pays much by historical standards.

But there are some small pockets of corporate, foreign, and municipal issues that seem poised to offer extra returns without piling on the risk. Here are four examples.

RIDE THE ROLLDOWN. One striking feature of high-quality U.S. bonds today is the steep yield curve. By keeping core interest rates near zero, the Federal Reserve has reduced short-term bond yields to diddly but has had a more limited effect on long-term yields. So while the two-year Treasury recently yielded about 0.2%, the 30-year version yielded 2.7%, an unusually wide spread. Late last quarter, Pimco's Bill Gross predicted via Twitter that the curve will remain "very steep" for a "very long time".

That's an opportunity for bond buyers, because as bonds age, they roll down the yield curve. A nine-year Verizon Communications bond recently yielded 3.2%, while one that matures after six and a half years recently yielded 2.6%. Because bond coupons are fixed, the only way for the longer bond to match the yield of the shorter one as it ages is for the price to rise. Of course, that depends on yields remaining low and the yield curve retaining its shape—two big assumptions. But the rollback strategy at least gives bond buyers a chance to grab some extra yield and potential for price gains, without loading up on risk.

PUT JUNK ON A LEASH. Junk bonds tend to dive when the economy weakens, so safety-minded investors should resist the urge to load up. But some special-situation bonds offer extra yield without a huge increase in risk. For example, when an issuer announces an early redemption that it will carry out, say, three months from now, the bonds are a much safer bet than usual during those final three months, but their yields can remain fairly plump.
RiverPark Short-Term High Yield
(ticker: RPHYX), a mutual fund, specializes in buying such "called" bonds and other niche issues. Fund Manager David Sherman said it recently had an expected yield of 3.5% to 4.5%; the uncertainty stems from the fact that 40% to 60% of the portfolio typically converts to cash in any 60-day period, so the portfolio yield depends on how the money is reinvested.

EMERGING MARKETS, HOLD THE DOLLARS. Government bonds issued in emerging markets like Brazil and Malaysia have twin appeal for investors. Yields are typically higher than those on U.S. government bonds, and many such countries have lower debt and faster growth than the U.S., which can improve their creditworthiness over time—something that can lift bond prices. Investors have piled into emerging-market bonds of late, pushing yields lower, but they have shown a preference for dollar-denominated ones, making local-currency bonds attractive by comparison.

When Long Goes Wrong

Distant-maturity Treasuries offer higher yields, but get hit harder when yields jump, as evidenced this year.

Yield on

Yield on

Total

1/31/12

3/19/12

Return

Five-year Treasury

0.7%

1.2%

-2%

10-year Treasury

1.8

2.3

-4

30-year Treasury

3.0

3.5

-7

Source: Schwab

The yield to maturity on the JPMorgan EMBI Global index of dollar-denominated government bonds has fallen to 4.7% from 6.1% since the end of last year. The JPMorgan GBI-EM Global Composite index of locally denominated government bonds typically yields more; although its yield has fallen, too, the spread between the two yields has widened to 1.3 percentage points from 1. The
Market Vectors Emerging Markets Local Currency Bondemlc 0.199203187250996%Market Vectors Emerging Markets Local Currency Bond ETFU.S.: NYSE Arca20.12
0.040.199203187250996%
/Date(1427835600139-0500)/
Volume (Delayed 15m)
:
754686AFTER HOURS20.13
0.009999999999998010.04970178926441352%
Volume (Delayed 15m)
:
450581
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
5.844930417495029% Rev. per Employee
N/AMore quote details and news »emlcinYour ValueYour ChangeShort position
ETF (EMLC) is one way to buy such bonds. Locally denominated bonds bring exposure to currency swings, which can add volatility in the short term, but can also offer protection in the event the dollar's value slides over the long term.

HUG THE UNLOVED. Sometimes bonds are unpopular for reasons other than their credit quality. Dan Heckman, a fixed-income strategist at US Bank Wealth Management in Minneapolis, likes bonds from bank issuers like JPMorgan and Wells Fargo, because investors remain cautious on banks even though the industry has been forced to raise capital and improve its creditworthiness. Ten-year bank bonds pay 1.8 percentage points more than 10-year Treasuries, versus a spread of 1.45 percentage points for nonbank bonds of similar credit quality, according to Heckman.

He also likes municipals; 10-year double-A-rated ones yield a touch more than the 10-year Treasury, and muni income generally escapes federal taxation. In particular, he likes eight- to 11-year sewer, water, gas, and electric bonds from markets that were hard-hit by the housing downturn, like big cities in Arizona and Florida. Those areas stand to gain more than others from an ongoing housing recovery, but muni investors remain down on them, giving contrarians an opportunity to pick up an extra 0.25% to 0.3% in yield.